Viet Nam’s Future and the Role of the Asian Development Bank

Public Lecture at the Foreign Trade University by Takehiko Nakao, President, Asian Development Bank on 15 January 2014 in Viet Nam

(as drafted)

I. Introduction

Good morning.

Distinguished guests and colleagues: thank you for your warm welcome. I am very pleased to be here today, and I thank the Foreign Trade University for inviting me to speak at this prestigious university.

Today, I would like to talk about the opportunities and challenges facing Developing Asia, in particular Viet Nam and its quest to become a modern industrialized country. This vision is certainly attainable. But there are challenges to overcome.

Viet Nam has achieved its third consecutive year of macroeconomic stability. The Government has sharply reduced inflation, stabilized the exchange rate, and built up a strong current account surplus and higher foreign reserves. However, while government policy has succeeded in reducing macroeconomic instability, more progress is needed to address the economy’s structural weaknesses. Structural reforms and improved governance are needed to create an enabling business environment that encourages entrepreneurship and innovation.

Recent external shocks have inevitably slowed the reform process in Viet Nam. But they also highlight institutional weaknesses that predated the global financial crisis. Hence, Viet Nam should continue pursuing market-oriented reforms and increasing integration with the global economy.

Viet Nam must also ensure that growth is inclusive and benefits all segments of the society. Equality of opportunity will not only help unleash Viet Nam’s full economic potential, it will also support inclusiveness and improve income distribution. The Government should not only enhance public services such as health and education, but also ensure access to jobs, finance, and business start-ups.

So in my view, to achieve its vision, Viet Nam must become more innovative, more inclusive, and more integrated. I will come back to this in a moment.

First, however, let me give you all a brief introduction to the Asian Development Bank (ADB).

II. Role of ADB

Our institution has been working in partnership with the Government of Viet Nam, which was a founding member of ADB in 1966. Since resuming operations in Viet Nam in 1993, ADB’s assistance to the public sector has amounted to $13 billion. This includes 131 loans totaling $12.5 billion ($6.3 billion from Ordinary Capital Resources and $6.2 billion from Asian Development Fund), 276 technical assistance projects amounting to $255 million, and 31 grants with a total amount of $305 million. The sectors with the largest shares in terms of cumulative lending amount are: (i) transport and communications (33.9%), (ii) energy (20.2%), and (iii) agriculture and natural resources (13.6%).

As part of its regular operations, ADB coordinates closely with Viet Nam’s development partners to improve the effectiveness, efficiency, and impact of its lending and non-lending programs. We also work closely with civil society organizations and the private sector in Viet Nam to mobilize financial resources and expertise from other partners.

Our Country Partnership Strategy (CPS) for 2012–2015 is fully aligned with Viet Nam’s Socio-Economic Development Plan (SEDP) for 2011–2015, and will support issues arising from Viet Nam’s recent transition to a middle-income country. The CPS focuses ADB assistance to Viet Nam on three pillars: inclusive growth, enhancing economic efficiency, and environmental sustainability. To maximize ADB’s development impacts, ADB prioritizes six sectors: (i) agriculture and natural resources; (ii) education; (iii) energy; (iv) finance; (v) transport; and (vi) water supply, along with other municipal infrastructure and services. Public sector management is a crosscutting theme, and is mainstreamed in terms of sector operations through reform and policy-oriented support.

ADB actively supports the government’s commitment to comprehensive economic restructuring and continued reform, particularly to increase the depth and efficiency of the financial sector, and to improve corporate governance and efficiencies of state-owned enterprises (SOEs). To facilitate faster development of infrastructure, we are assisting in the development of a pilot scheme to promote public–private partnerships.

III. Challenges confronting Viet Nam

Now let me address the main topic of my presentation: the challenges facing Viet Nam.

To better achieve its potential, Viet Nam must deal with multiple risks and challenges such as improving competitiveness, managing growing inequities, and developing governance and institutional capacity.

The main factor determining failure or success will be Viet Nam’s ability to innovate and upgrade its production processes. This crucial shift requires flexibility in setting policy. It also requires large investments in human capital to create a skilled and innovative work force. Providing good physical infrastructure to deal with increasing demands and promoting new advances in technology will also be critical. Rapid and sustainable growth should also be supported by imposing market discipline on SOEs, and through stronger supervision of the financial system.

Let me elaborate on these points by focusing on how innovation, inclusiveness and integration can help Viet Nam.

IV. Innovation through competition and improved governance

Viet Nam needs to create an enabling business environment that encourages entrepreneurship and innovation. This requires improved governance, greater transparency and disclosure of policy-making, and regulation. Enterprises should be able to compete on equal terms for land, credit, and business information, regardless of ownership.

Reforming the SOE sector is therefore vital for private sector development. Appropriate reforms will create opportunities for private investment, reduce the costs of doing business, and improve basic services by introducing private sector discipline and competitive market pressures.

SOEs that deliver core public infrastructure services—airports and ports, telecommunications, power and water utilities—may continue to play an important role in Viet Nam’s development. However, the domestic private sector is also playing a pivotal role, contributing almost 50 percent of GDP and absorbing some 1.5 million workers per year in the last several years.

Viet Nam needs to find the right balance between the roles of the public and private sector in the economy. ADB is providing over $600 million to restructure some SOEs. We are also supporting private sector development through the development of small and medium enterprises (SMEs) and microfinance programs.

The quality of human resources is also important for enhancing innovation. The famous Vietnamese philosopher, Than Nhan Trung said in the 15th Century that "Excellent talents with good virtue are key resources of the country. If these resources are strong, the country will progress and be strong." ADB certainly agrees with this philosophy. We are scaling up support for education, including technical and vocational education and training, to help Viet Nam achieve its development aspirations.

V. Inclusiveness through improved physical and social infrastructure

Along with innovation, Viet Nam must ensure growth benefits all segments of the population. Physical infrastructure provides the foundations of economic growth. It also improves access to services and opportunities, and enhances trade and investment by improving competitiveness and reducing the costs of doing business. Social infrastructure, such as education and health, is also essential. Viet Nam has come a long way in providing basic physical and social infrastructure but more needs to be done.

Between now and 2025, for example, Viet Nam will be transformed as its urban population almost doubles to 50 million. Its cities will be the centers of higher education, innovation and technological development. The quality of infrastructure in urban areas will thus increasingly determine Viet Nam's long term competitiveness and social stability. The reality at present, however, is one of inadequate water and urban sanitation infrastructure, and power shortages.

In the field of education and training, the Government, along with development partners such as ADB, has made significant, long-term efforts to enhancing the access to and quality of education. These efforts have led Vietnamese students to major achievements in the OECD’s Programme for International Student Achievement (PISA) 2012. However, there remains a significant gap in access to primary and secondary schooling among household income levels, ethnic groups, gender, and geographic regions. Particularly in disadvantaged areas, school-age children cannot get a minimum level of life-long skills due to lack of qualified teachers and education facilities.    

ADB supports inclusive growth through microfinance and rural development, gender equity, scaling-up of education including technical and vocational education, and targeting disadvantaged provinces, particularly in the central and northern mountainous regions.

VI. Integration through regional cooperation

Regional cooperation and integration, or RCI, allows countries to access larger markets and participate in extensive value chains. Greater intraregional trade underlies Southeast Asia’s recent resilience.

Since 1992, ADB’s Greater Mekong Sub region (GMS) Program has made an important contribution to the increased integration of the region, focusing on 3 C’s–connectivity, competitiveness, and community. ADB supports transport and power connectivity, economic corridor development, HIV/AIDs and other communicable diseases control, natural resources and environment management, and tourism.

Viet Nam has actively participated in the GMS program, and accounts for nearly half of ADB’s total lending to GMS projects. These projects include the Kunming-Haiphong Transport Corridor Noi Bai-Lao Cai Highway, the Southern Coastal Corridor, Corridor Towns Development, and the Biodiversity Conservation Corridor.

These projects have proven results. For example, the travel time between Phnom Penh and Ho Chi Minh City has been shortened by six hours and is now facilitating cross-border trade and tourism flows. The GMS Tourism project has contributed to significantly increasing visitor arrivals.

VII. Financing for investment

The investments needed to promote a more innovative, inclusive, and integrated Viet Nam are huge. For infrastructure financing alone, Viet Nam will need an estimated $167 billion over the next decade to sustain the desired growth trajectory.

Only about half this amount is expected to come from the state budget, including Official Development Assistance and government bond financing. Private investment in infrastructure is essential.

Given the immense needs for infrastructure development, mobilizing adequate finance remains a key challenge. Developing domestic capital markets and encouraging local currency lending will help to tap into Viet Nam’s potentially large domestic savings. ADB supports development of a deeper bond market that will enable long-term funding to be channeled to much-needed infrastructure projects.

The Government has recognized the potential of public-private partnerships (PPPs). Still, Viet Nam faces challenges to promote PPPs. ADB is supporting the Government’s initiative to strengthen the PPP regulatory framework and to build the capacity of PPP institutions.

In addition, infrastructure funds such as the ASEAN Infrastructure Fund (AIF) can significantly contribute to meeting the financing requirements of the ASEAN countries, including Viet Nam.

VIII. Conclusion

In closing, I am confident in Viet Nam's strong potential over the medium- to long-term. Its large market of 90 million people, strategic location and young and hardworking labor force certainly warrants optimism.

However, I must stress that Viet Nam must not assume its vision of becoming a modern industrialized country is pre-ordained. Getting there will require visionary leadership, capable public administration, and innovative entrepreneurship.

In 2013, ADB celebrated a 20 year working relationship with Viet Nam, and we are committed to working with Viet Nam for another 20 years. During those 20 years, every student in this room has an important role to play to shaping Viet Nam’s future. You are the future leaders, civil servants, and entrepreneurs of this country, and ADB is privileged to partner with you.

Xin cam on.